liquidation reserve, shareholder rights

The liquidation reserve and modulating shareholder rights

 liquidation reserve, shareholder rights

For a number of years, SME companies can transfer (part of) their accounting profit after tax to a so-called liquidation reserve, provided a special tax of 10% is paid at the time of transfer.

Advantage of the liquidation reserve

In the event of a later liquidation, the accrued liquidation reserve can be distributed to the shareholders-natural persons tax-free.

In the event of the distribution of the liquidation reserve before the company’s liquidation but after a 5 year period, an additional 5% withholding tax shall be payable. But if the reserves are distributed within a 5 year period, an additional 17% withholding tax is payable for liquidation reserves established before tax year 2018 and 20% for liquidation reserves as from tax year 2018.

What in case of mixed shareholding?

As the exemption from withholding tax in the event of liquidation does not apply to corporate shareholders, which can apply a tax credit for any withholding tax and fully exempt the dividend received, it makes no sense to create a liquidation reserve and pay 10 % additional tax, if there are only corporate shareholder.

But what if at the start there were only shareholders-natural persons in the company and later on corporate shareholders join(ed)?

Distributions from the liquidation reserve will then accrue proportionally to the shareholders-natural persons and to the corporate shareholders, as a result of which the tax advantage of the reduced withholding tax is partly lost and the separate tax of 10% was in fact paid for nothing.

How to solve?

The new Company Code provides for the possibility to differentiate the rights attached to shares (voting and profit rights) in the articles of association. This means that, for example, one can create 2 types of shares, namely a category A being the shares held by natural persons and a category B being the shares held by companies. Furthermore, it can then be foreseen that all shares still are entitled to an equal share of the profit, but that dividends granted to shares A are allocated in priority from the liquidation reserves and dividends granted to shares B in preference from other reserves. In this way, the advantage of the reduced withholding tax associated with the liquidation reserves can be fully utilized.

The ruling commission recently approved this method in a specific case and sees no tax abuse in it as long as the amendment to the articles of association is implemented in order to facilitate the entry of new corporate shareholder.

But reflect before you start!

For companies with VVPR-bis capital (reduced withholding tax), the VVPR-bis advantage may be lost by modulating the rights attached to the shares. This advantage also consists in a reduction of the withholding tax on dividends allocated to the VVPR-bis shares, provided a number of conditions are met and a waiting period has been observed.

One of these conditions is that no preferential shares may be created. While this is not allowed according to the wordings of the law at the time of the capital increase, the Minister of Finance now seems to have taken the position that making shares preferential at a later date also leads to loss of the VVPR-bis advantage. There is therefore a risk that modulating the shares in the context of the liquidation reserve is regarded as creating preferential shares, as a result of which the VVPR-bis shares lose their favourable tax status.


The possibility provided by the Company Code to modulate the rights attached to shares is an opportunity to fully utilize the tax advantage associated with the liquidation reserves, if corporate shareholders join the company at a later date. However, care must be taken that modulating the rights attached to shares is motivated by reasons other than tax, and that other tax advantages such as the VVPR-bis regime are not lost as a result.